Vanguard Economic Report

Economic Week in Review: June 28-July 2, 2004

In a widely anticipated move to counter inflationary pressures, the
Federal Reserve Board raised short-term interest rates on Wednesday for
the first time in four years. The Fed's Open Market Committee (FOMC)
raised its target federal funds rate by 25 basis points to 1.25% and
again promised to raise rates at a "measured" pace. June's employment
figures, released Friday, were disappointing after three months of
strong reports. For the week, the S&P 500 Index fell 0.8% to 1,125. The
yield of the 10-year U.S. Treasury note fell 19 basis points to 4.46%.

Fed officials had signaled for weeks that short-term interest rates--
which were at their lowest levels in more than 40 years--could not
remain so low for much longer. In its statement announcing Wednesday's
rate hike, the FOMC said that it regarded the recent acceleration in
inflation as "transitory" and expressed confidence that inflation will
remain relatively low. That said, the FOMC indicated that it would
abandon its "measured" pace of rate increases "as needed to fulfill its
obligation to maintain price stability."

Nonfarm payrolls increased by 112,000 in June, the Labor Department
said, less than half the consensus expectations. Manufacturers cut jobs
for the first time since January, while the government sector lost jobs
for the second month in a row. Since August 2003, payroll employment
has risen by more than 1.5 million. The unemployment rate was unchanged
at 5.6%.

Consumers brought home larger paychecks in May and spent more than they
had in 2-1/2 years, the Commerce Department reported Monday. Personal
income increased 0.6%; disposable income, or income after taxes, grew
at the same rate. Meanwhile, personal spending grew 1.0%, up
significantly from April's increase of 0.2% and the largest increase
since October 2001. When adjusted for inflation, disposable income was
unchanged and spending rose a modest 0.4%.

Consumers were also far more confident. The Conference Board announced
that its index of consumer confidence rose from 93.1 in May to 101.9 in
June, its highest level since June 2002. The survey of 5,000 households
released Tuesday found consumers were decidedly more confident about
the labor market after several months of strong employment reports.

Construction spending climbed 0.3% in May to an annual rate of $988.5
billion, the Commerce Department reported, but fell short of analysts'
expectations of a 0.7% gain. Private construction rose 0.4%, while
public construction dipped 0.2%. Construction activity continued to be
driven by the single-family housing market; spending in the residential
construction climbed 0.8%.

Manufacturing expanded in June, but at a slower pace than in recent
months. The Institute for Supply Management (ISM) announced that its
index came in at 61.1, down from 62.8 in May, marking the eighth
consecutive month that the barometer of manufacturing activity was
above 60. (A reading above 50 indicates growth in the manufacturing
sector.) While the new orders, production, and backlog of orders
components of the index all declined from their May levels, they still
grew significantly. The employment component fell to 59.7 from 61.9 in
May, but this still signaled a steady increase in manufacturing
payrolls.

Factory orders fell 0.3% in May, following a 1.1% drop in April, the
Commerce Department said. Analysts had expected a decrease of 0.6%. New
orders for durable goods, which include products such as furniture and
appliances, fell 1.8% to $188.6 billion.

The economic week ahead:
The upcoming week should be a quiet one for economic news. The only
major reports scheduled for release are the ISM (Institute for Supply
Management) Non-Manufacturing Index (Tuesday) and consumer credit
(Thursday).